By LARRY
ROMANOFF – September 19, 2020
It
is a matter of urban legend in the West that China has no international brands.
With brand warfare being the current rage, so
many articles in so many Western media take apparent pleasure in mocking and
denigrating China for the apparent inability of Chinese companies to either
produce a brand attractive to Westerners or to effectively market it in the
West. One article in the Wall Street Journal claimed China could build ipads
and high-speed trains, but can't even make its own fancy handbag. There is much truth in the claim that few
Chinese brands have escaped their domestic environment to find comfortable
residence in Western countries, though the insinuation that this has been due
to Chinese shortcomings is not justified. The reasons lie elsewhere, as we
will see.
One seldom-mentioned reason for the absence
of Chinese brands on foreign shelves is that American, and especially
Jewish-owned, multinational firms have made a science of pre-emptive
registrations of brands and trademarks. As one Chinese media source reported,
"There are so many painful cases of
time-honored [Chinese] brands being pre-emptively registered by foreign
companies overseas and some enterprises have been unable to get their brand
names back."
Sometimes
these registrations are made by individuals hoping to profit by extorting large
cash payments later but, far more often, are done by US multinationals to
prevent the Chinese brands from ever becoming international competitors.
In most cases, the Chinese firms have no idea their brand names and trademarks
have been stolen and registered in all Western countries, and learn of the fact
only when they begin to expand internationally. When they do learn of it, most
are unfamiliar with the procedures of taking legal action against an American
company, and most Chinese don't trust
American courts to render fair judgment to a Chinese firm against an American
company or citizen. Think of Nike and Onitsuka, or of Citibank and the
Chinese citizens still trying to recover their gold. A few Japanese firms have
done this as well, but the practice appears to be almost entirely American.
When
China opened its doors to foreign trade and joined the WTO, the first
commandment imposed was that the country be fully open to what is
euphemistically termed "foreign investment".
To many of us, that might mean an American real estate development firm coming
to China to engage in development projects, P&G building a factory in China
to sell their soap and shampoo, or Coca-Cola or Pepsi making and marketing
their drinks, but that is not what happens and, in the instances where such attempts
were made, they have usually failed. Duracell tried for 15 years to establish
itself in China, yet succeeded in obtaining a market share of only a few
percentage points, China's Nanfu Battery commanding twenty times Duracell's
share. Instead, the process takes a very different path. Opening a country to foreign investment means making available for
foreign purchase every attractive domestic brand already in existence, with the
intent, the process, and the result, most often very different from those we
might expect.
In 2012, Nestle announced a partnership
agreement with Chinese candy and pastry producer Hsu Fu Chi to acquire a
60-percent stake in the company, and another deal for 60 percent of Yinlu Foods
Group, famous for its canned food and drinks. This was the 35th foreign purchase of a major Chinese brand during the
year, insiders claiming Nestle intends to dominate China's candy and pastry
market through the purchases, believing the brands will disappear altogether.
These fears are not unwarranted. Many domestic brands such as Maxam cosmetics,
purchased by S.C. Johnson, Panda Detergent (P&G), Nanfu battery (Gillette),
Mini Nurse cosmetics (L'Oreal), were stars in their respective markets until
purchased by foreign multinationals. Since the foreign beverage giants Pepsi
and Coca-Cola entered China in 1990s, the "big eight" Chinese
traditional beverage brands, which included Tianfu cola and Beibingyang
(Pepsi), Robust and Zhengguanghe (Danone), have all disappeared from the
market. The brutal truth is that selling
domestic companies to foreign multinationals seldom yields expansion for
Chinese brands, and most often will instead guarantee their demise. Foreign
companies like P&G, J&J, Coca-Cola, Pepsi, Nestle and Danone aim only
to enlarge the domestic market share of their own brands and, rather than
develop local brands, they kill them. In the first twelve months after S. C.
Johnson entered its JV with Shanghai's Maxam Cosmetics - the nation's leading
brand - Maxam's products had disappeared from the market and its production
fell by 98%. Since China opened its
doors to foreign companies, the country has seen a long list of venerable and
highly popular brands disappear from the market through these predatory
takeovers.
Wang Wei, Chairman of the China Mergers and
Acquisitions Association, said the influence of a brand like Hsu Fu Chi is
priceless, and it is difficult to
estimate the power of the cultural influence obtained by foreign companies when
acquiring domestic brands. If treasured domestic brands are not protected
against foreign companies during this period of the country's development,
China could lose these brands forever, at a distinct financial and cultural
loss to the nation - as has already occurred in large measure. Among all
domestic firms purchased by foreign ventures, time-honored brands face the
biggest challenge. At the beginning of
China's restructuring and opening-up, the country had no established norms for
evaluating its famous brands, and many of these were sold at low prices to essentially
hostile purchasers. The country's new regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors now require that all
takeovers of famous brands be subject to special approval.
Instead of simply placing all attractive domestic
brands on the sale table, Chinese officials attempted to protect them through
the establishment of joint ventures with foreign corporations that would result
in their expansion and growth. Most often, the local brand and IP, plus the
manufacturing and distribution facilities would be placed into one of these
joint ventures as the Chinese contribution, with an equivalent value of foreign
capital and knowhow from the foreign enterprise. The promise (and the hope)
were always that these JVs and mergers would accelerate China's industrial
development by the promotion and expansion of the nation's many and valuable
domestic brands into international markets. In each case, the foreign firm
(usually American) would vow to use its resources to promote and enhance the
domestic brands put into these JVs by unsuspecting Chinese businesses. The
Joint Venture alliances were presented on the basis they would help domestic
companies upgrade their design and innovation capability, and remove obstacles
preventing these local companies from expanding worldwide.
The Americans painted an attractive picture
of a solid R&D base, unlimited financing, extensive international marketing
and management experience, all of which they promised would be fully brought to
bear to the benefit of their Chinese JV partner. But American (and other foreign) multinationals see no value in, and have
no use for, other countries' domestic brands. Their business strategies are
almost always designed to promote and develop their own brands, the foreign
firms simply coveting the sales channels and marketing resources established by
domestic brands. Therefore, the plan from the very beginning was to eliminate domestic competition by quickly
shelving all popular domestic brands they purchased. The effect in
virtually every instance has been that predatory US-based MNCs would simply
seek dominance for their own brands, permanently impairing market control by
domestic firms and eventually destroying domestic brands rather than developing
them.
One
of the most important entry strategies by US and European multinationals when
entering consumer markets in developing economies, is to acquire the
distribution channels that provide efficient
access to the local market. This is very important in China's consumer-goods
market, since foreign manufacturers normally find consumer-products
distribution to be quite difficult and confusing. The distribution systems are
often locally and regionally fragmented, consumers and retail outlets are
scattered widely across regions, and tastes may differ substantially by region.
China's market fragmentation may be the only thing that saves it, since in most
industries it is difficult for even a predatory foreign company to achieve a
market share of more than 5% for its own brands by its own efforts. These MNCs
therefore turn to purchasing local brands with adequate manufacturing
facilities and good distribution systems, then use these to simultaneously
remove competitive domestic brands from the market and substitute their own
products. Most multinationals,
especially those that are US-based, are renowned for this kind of predatory
mercantilist capitalism, and US-based capital almost always takes this strategy
in China. As one writer stated:
"The entry of foreign capital into China
has been colloquially categorised as "a three step process": (1) buy
the Chinese brands and freeze them, quietly removing these local competitors
while using their distribution channels and market resources to promote the
American brands. (2) Simultaneously, bleed the JV dry by siphoning all the
profits to the US parent. Then, (3) purchase the skeleton and bury it."
For American and Jewish-owned MNCs, the first
step is to establish a joint-venture
by promising to apply their extensive capital, knowledge, international
experience and awesome marketing abilities toward promoting the local brand.
The second step is to deliberately skew
the JV's accounting, finance and marketing departments to incur significant
consecutive annual losses, until the Chinese JV shares are essentially
worthless. The third, and final, step is to buy the profitless Chinese shares from the original owner at pennies on
the dollar, and shut down the JV. The result is that in only a few years the Chinese brand has disappeared from the
market and been replaced by an American brand, usually with the IP of the local
brand owned by the US firm, preventing any possibility of a return to the
market. Many Chinese brands were swept up in the tide of the new market
economy, hoping to draw support from foreign capital, talent, and experience to
boost the development of their companies and brands, but the owners and
officials were inexperienced and naive, and many of those old brands quickly
fell into oblivion after being acquired by the much more clever foreign
predators. For those lucky enough to survive, their market shares have shrunk
considerably, and the resurrected brands return to the market only to find
themselves facing their colonisers who had meanwhile grown much stronger.
These International (and largely
Zionist-owned) companies in particular seek market domination, large market share
and profitability being insufficient, with an absolute necessity to kill off any competing domestic brands and
completely dominate each segment of a market, the plan being that wherever
you are in the world, you will find only American brands. When the Shanghai
government forced Johnson Controls to close down their battery plant due to
serious lead poisoning in the area population, a news report told us the real problem was that: "the
dispute has complicated Johnson Controls' ... aggressive bid to dominate that
market." And they must dominate those markets by force, because that
is the only means of controlling pricing, forcing adaptation to American
"standards", and ensuring huge profits. The standard strategy is to enter an unprotected or less-developed
market and use whatever tactics are necessary, including political and economic
pressure from the US State Department, to buy up all the best local brands in
an industry. Their next act is to close all those factories, not because they
aren't popular or profitable, but to kill the brands. They then introduce
their own US products into the newly-created void, and the nation's choice now
is "American or nothing". Of course, foreign firms employing this
strategy in the US market would be subject to immediate and punitive sanctions,
and hundreds of new laws would be passed to prevent foreign ownership.
•The
Story of Tianfu Cola
By
the early 1990s, Tianfu Cola was a Chinese icon, one of the largest beverage
makers in the world and commanding an 80% share of Chinese cola market and was
already being sold in Russia and the US. Tianfu's
formula had no resemblance to the sugar-water drinks like Pepsi or Coca-Cola,
the company having developed an entirely new cola beverage that contained
Chinese medicinal herbs with notable health benefits. Instead of damaging
health in the manner of Pepsi or Coke, Tianfu had an extensively-documented
history of effective defense against common viruses. It was therefore not only
extremely popular but quite healthy as well and, at the time of its ill-fated
adventure with Pepsi, the company had
108 bottling plants across the country, well over 1 billion RMB in assets, and
was highly profitable.
Then
in 1994, Tianfu entered into a JV with US-based Pepsi, and in eight years the
brand was dead and the company bankrupt.
Tianfu put their branded products, their formulas, methods and processes into
the JV with an equivalent cash injection from the other side, the contract
containing a government stipulation that Tianfu-branded beverages must form no
less than 50% of the JV's annual production. Pepsi adhered to this requirement
initially, actually increasing the ratio above 50% for two years, then, when
government oversight ceased, Pepsi abandoned their legal obligation and in a few years Tianfu beverages fell to
only 0.2% of production, Pepsi's brands having completely overtaken the JV and
replaced Tianfu in the market.
The cause of the collapse was not difficult
to ascertain. The owner of Tianfu said, "The joint venture runs well every
year, but every year it is in loss; the profits are directionally transferred
by PepsiCo through expensive purchase of concentrate from its company."
So, while Pepsi continued shrinking production of the Tianfu brands, and making
huge profits for itself by milking all the cash into its own company, the
Tianfu Group was dragged deeply into debt because the venture failed to turn a
profit. The key was that Pepsi cleverly
transferred the rights to the preparation and distribution of concentrate from
the JV into their own hands, and so during the early few years, even though
sales of Tianfu were soaring, the JV incurred huge losses because Pepsi drastically increased the cost of the
concentrate every year, ensuring the JV could never make a profit. In fact,
Pepsi was siphoning into its own pockets much more than the JVs entire profits,
with the JV incurring losses as high as 140 million yuan in one year, and
cumulative losses of more than 1 billion RMB, all of those funds having been
transferred to Pepsi's accounts. The plot was even more clever than I've
described. Pepsi had injected a significant amount of cash into the JV, so the
first order of the day was to recover that investment. Note the comment above
that for the first two or so years of the JV Pepsi increased the production of
the Tianfu brand above the stipulated 50%; it fact, it briefly reached about
75% at one stage. Since Pepsi controlled the concentrate and the pricing, the
quickest way to 'legally' extract their initial investment from the JV was to
hugely increase the production (and revenue, and profits) of Tianfu Cola, but
charge an exorbitant price for the concentrate consumed and by that means suck
all the cash out of the JV. Once that occurred, the JV had already been bled
dry but Pepsi, like Dracula, continued feeding on the dying corpus, while
simultaneously replacing Tianfu Cola with Pepsi products in all the channels. The process continued until corpus became
cadaver.
He
Qian Huang put a company with over 1 billion in assets and a brand with an 80%
market share into a JV with an American firm, and in little more than a handful
of years both the firm and the assets had disappeared.
Of course, as the JV went further into debt, Pepsi simultaneously increased
production of its own brands while cutting back on Tianfu's production until it
reached zero and the product had disappeared from the market. Pepsi then
shuttered the plants and the original owner sold his shares in the JV to Pepsi
for a pittance and walked away from his investment, and that was the end of
another iconic Chinese brand. We might reasonably expect an American firm to
suffer a huge loss by purchasing a competing brand only to remove it from the
market by killing it, but that isn't how it works. Pepsi didn't lose anything
by killing Tianfu. Instead, they quickly recovered
their original investment many times over, rid themselves of their major
competitor, gained significant market share for their Pepsi products and made a
2 billion profit, all from the process of destroying their main competitor.
And that is the entire story.
The deliberate destruction of the brand and
the collapse of the company resulted in a protracted lawsuit against Pepsi
which, in spite of Pepsi's interminable delays, eventually resulted in victory
for the original owner of the brand who won a court order for the return of the
Tianfu brand, the recipes and processes. But, in spite of the court orders to
cease all brand usage, Pepsi refused, claiming the necessity of yet another
court order to compel their obedience. Nevertheless, the original owner has
repossessed his main asset of more than 20 years prior and Tianfu Cola has
resumed production. The problem of course, as in all these cases, is that the
consumer landscape has changed enormously in the interim. In Tianfu's case, the
younger generations have no knowledge of the product, and the cola market has
in the interim been taken over and dominated by Pepsi and Coca-Cola. To become
re-established in a market after a 20-year absence is clearly neither easy nor
inexpensive. As one Chinese columnist noted, "This case has been depicted
as being symbolic of the struggle of some domestic businesses as they attempt
to maintain their market share after aggressive, and potentially ruinous, joint
ventures." For their part, as in
all such cases with American firms, Pepsi were not only arrogant and
unrepentant, but infuriatingly dishonest: "We have not only absorbed
and hired more than a thousand local employees, but also provided various extra
financial support to both the joint venture and the local partners".
Tianfu
Cola was neither the first nor only treasured and highly-successful Chinese
brand that Pepsi killed. This US-based firm pulled almost precisely the same
stunt on a long list of Chinese beverages,
all of which were seen as potential competitors to Pepsi and therefore suffered
the same demise. Pepsi was widely criticised for a similar situation, at about
the same time, with Beibingyang (Arctic
Ocean), a leading Chinese soft drink company with its white bear logo that
had been dominant in China for 40 years and which produced a range of flavored
soft drinks and bottled water. Pepsi
entered into a similar JV with Beibingyang, and within five years the brand was
dead, the factories closed, and the JV bankrupt. As with Tianfu Cola, Pepsi
made legal undertakings to government authorities to develop and bring new
vigor to the company's brands, but they clearly had the opposite intent. In
fact, in this case, Pepsi established four separate JVs, each relating to one
of the company's branded products, with a clear intention to kill each one. As
with Tianfu, the original owners have won legal battles to repossess their
brands and have reintroduced their products to the market. And, as with Tianfu, this is now an uphill
battle with the product having been absent from the marketplace for so many
years and now having to compete with well-established foreign brands.
Nevertheless Beibingyang is back on the shelves with hundreds of distributors
and tens of thousands of outlets, and will hopefully recover its prior market
position.
And it isn't only soft drinks. Consumers in
China will have noticed that so many supermarkets, convenience stores and other
shops seem to have removed almost all domestic brands of packaged potato chips
and similar snacks and are now flooded with only Lay's brand. That's Pepsi's
executives at work again, desperately looking for ways to increase profits and
satisfy their owners who are unhappy with its loss of market share in the US.
Pepsi's executives are distressed that unhealthy per capita potato chip
consumption in China is only one small bag per month compared with 15 bags in
the US, and that Chinese buy an unhealthy beverage like Pepsi only about 200
times per year, while the average American buys 1,500. Company executives claim
China will be the largest consumer market and Pepsi means to be the largest food and beverage company in China,
dominating the Chinese market - even if it has to destroy every Chinese brand
to do this. According to Pepsi executives, this demonstrates their
"commitment" to China. I hold the fond hope that Chinese consumers
will recognise Pepsi and its executives as they are and, rather than helping
Pepsi fulfill their dream of dominating the Chinese market, will accord Pepsi
the same fate it dealt to so many treasured Chinese brands - by refusing to
purchase any Pepsi products. We should all hope that day comes.
The Pepsi-Tianfu case is only the tip of the
iceberg, in terms of business deals between foreign and Chinese companies that
have gone wrong. Analysts point to litigation in industries ranging from
beverages and chemicals, to automobiles and pharmaceuticals. A partner in a
Beijing law firm said
"The '80s and '90s were rife with such
cases, based on foreign companies slobbering at the Chinese market potential,
and local companies being hungry for capital. In these decades, local brands
fell behind in terms of technology upgrades and sales, driving them into the arms of foreign companies only too willing to set
a foot into China. However ... local brands were marginalized or forced out of
business."
An article in the Global Times reported that He Weiwen, a professor with the University
of International Business and Economics, said these alliances were not
always negative and could sometimes help Chinese companies enhance their
abilities and expand worldwide. Perhaps, but I am unaware of any situations where that actually occurred.
And the Economist Magazine, by no means
renowned for either intelligence or impartiality, wrote an especially
uninformed article claiming China's soft drinks companies were no match for
foreign competition. The Economist specifically referenced the famous Jianlibao Group's brands, noting they
were among the best-known in China, but which are, "in the face of foreign
competition from the likes of Coca-Cola and PepsiCo ... teetering on the brink
of ruin." Our child writers at the Economist were lamenting the fact that
after Jianlibao had been driven into
debt and seen its market share plummet from its experience in a foreign JV, the
company was rescued by a Chinese state-owned firm to ensure its survival. The
Economist went so far as to claim that "As one of the less protected
Chinese industries, the soft-drinks sector has had long experience of what life
might be like under WTO rules. Jianlibao's misfortunes have shown the perils of
trying to compete head on with multinational giants ...." But this is dishonest reporting.
Jianlibao's misfortunes have shown the perils of trusting foreign companies in
JVs, as Tianfu, Beibingyang and so many dozens of others have discovered, and
this illuminates the real but hidden intent behind WTO "rules".
•Mini-Nurse
A few years ago, L’Oréal came to China with a
new low-end brand of cosmetics and skin care products named Garnier, intended
in large part to convert 300 million young Chinese men into perfume sachets. In
addition to a vast, expensive (and foolish) marketing campaign, L’Oréal needed
two other things: manufacturing facilities and a distribution system.
Mini-Nurse had both. At the time of its
purchase in 2003, Mini Nurse was one of the top three skincare brands in China,
a beloved domestic mass-market brand, with a major market share and an enviable
reputation for the quality and affordability of its products. In addition
to its enormous customer base, Mini-nurse had extensive manufacturing
facilities and what was perhaps the
largest distribution system in the country, with its products in more than
280,000 outlets throughout China, and was on the verge of taking its brand
into international markets. The great advantage to L’Oréal was the powerful
distribution channel, since the company would have needed decades to build a
channel of that depth on their own. And of course, the ready-made manufacturing
facilities that could be converted to L’Oréal’s Garnier brand. At the time of
the acquisition, L’Oréal executives said, "We think it's a great asset for
us to develop the Chinese market, as Chinese consumers love the brand.
Mini-Nurse can reach the consumers that other brands can't reach. Mini-Nurse
complements L’Oréal’s brand portfolio perfectly and enables us to move more
quickly into the Chinese consumer skincare market." But L’Oréal had no sooner completed the
purchase than Mini-Nurse began evaporating from the market, pushed to the
side in both manufacturing and marketing, to make way for Garnier. Today,
Mini-Nurse has almost entirely disappeared from the Chinese market, never to
reappear since one of the clever conditions of the sale was that the creator of
the brand could not engage in the skincare business in the future.
Many industry insiders and perhaps most
Chinese customers question L’Oréal's real purpose in the acquisition, the
weight of evidence being that Mini-Nurse was purchased only as a platform for
the launch of L’Oréal's Garnier brand and was disposable, all indications being
that L’Oréal simply wanted to establish its low-end Garnier before killing off
its competition. L’Oréal denied plans to
kill the brand, but the facts tell a different story. After a huge public
outcry, company executives made sporadic weak efforts to promote the brand, and
it's possible that government pressure to maintain the brand may be keeping it
alive, but Mini-Nurse is now like a zombie, neither alive nor dead. The
consensus is L’Oréal will maintain this status for a short time, then blame
poor sales for its eventual demise. L’Oréal has declined to disclose details of
its plans. "We're not ready today to talk about Mini-Nurse. It's not an
easy topic, it's challenging. But one thing we're sure of is that we didn't buy
Mini-Nurse with the intention of taking it out of the Chinese market.”
Nevertheless, that was the result, the irony being that L’Oréal's Garnier brand
experienced a well-deserved premature death, leaving that portion of the
skincare landscape bare, and yet another
treasured Chinese brand gone forever after suffering a foreign acquisition.
I should note here that the comments above by a L’Oréal executive were
dissembling nonsense; Mini-Nurse was
thriving, profitable, and growing rapidly until L’Oréal stuck their fingers
into it, so why would it today be 'difficult and challenging'?
•Shanghai
Jahwa
Maxam
was an international cosmetics brand that was born in Shanghai in the early
1960s, and by the late 1980s was China's leading cosmetics brand with a market
share of more than 20%, excellent management, was a financial powerhouse and
was extremely innovative in both product development and marketing.
The company produced China's first hairspray for Chinese women, the first
sunblock cream for Chinese skin, the country's pre-eminent hand lotion, opened
the nation's first beauty schools and salons, and introduced specialist
consultations in cosmetics marketing. Once again, Shanghai Maxam was headed for a prominent position in international
markets.
Then, yet another American-engineered
disaster. In 1990, the Shanghai City
government, eager to attract "foreign investment", pushed Shanghai
Jahwa into a JV with US-based S. C. Johnson, into which Jahwa contributed
two-thirds of the company's fixed assets as well as its Ruby and Maxam brands
and most of the company's top employees. But, as we would expect, within three years, sales plummeted by
about 98% from over 300 million to less than 6 million and the Maxam brands
evaporated from the stores seemingly overnight. After protracted recriminations,
the Shanghai government forced a divestiture of Jahwa from S. C. Johnson (at a
price of about 500 million RMB) and brought the brand back into the market. But
by then it was four years later and Maxam had lost its place in the market and
would re-emerge in a new environment flooded with new foreign brand names.
Shanghai has since placed Jahwa and its Maxam and other cosmetics brands as a
separate corporate entity, with only domestic Chinese shareholders.
The placement of Shanghai Jahwa onto the
market was an event that generated a great deal of interest, primarily from
foreign wolves who smelled fresh prey but the
Shanghai government set several restrictions on the sale of Jahwa, including
the elimination of foreign bankers and hedge funds, the main one being that
only domestic Chinese purchasers would be considered for any part of the
shareholding. Another was a matter of resources, the Shanghai government
stipulating any major purchaser required assets of at least 50 billion RMB. A Jahwa executive stated that "The
company that would like to acquire Jahwa the most is Procter & Gamble Co.
But we will never give our company to [those *****]." He also noted
that Temasek Holdings, the Singapore government's investment company that had
already proven its character in China, was also drooling over Jahwa but, after
relating the terms of a sale, "we didn't hear further from them".
Maxam is fortunate to have had the Shanghai government as their original owner,
with the resources to protect and resurrect the company, and the brand has
returned to the market and the awareness of Chinese consumers with high
expectations for its resurgence. As well, Maxam has been a great success
internationally, especially in Europe where it is a well-recognised premium cosmetics
brand carried in thousands of retail outlets. Jahwa has also forged alliances
with international firms to assist in market expansion. The company's
successful launch of its Herborist brand of cosmetics was one such success and
it brought back its famous Shanghai VIVE into the high-end makeup market in
China.
It was interesting to read an article in the
Financial Times by Louise Lucas and Patti Waldmeir, so typically vacuous,
painting an ideologically-blind American picture praising the blessings of free-market
capitalism, writing that the sale was "paving the way for one of China’s
top cosmetics manufacturers to compete more commercially", adding that
"Domestic groups have fallen behind on their home turf [and that] just one
of the top 10 skincare companies is Chinese." These two ladies neglected
to mention that the reason 'just one of the top companies is Chinese' is that China had too many companies like L'Oreal
and S. C. Johnson who bought and killed all the prominent Chinese brands.
They did mention that Jahwa entered an "ill-conceived" JV with
Johnson, but forgot to point out that the "ill-conceived" part of
that JV consisted in placing trust in Americans since, instead of
"competing more commercially", Jahwa was instead driven out of the
market by the same private ownership they praise. They also managed to locate a
Chinese expert, in this case, Zhang
Weijiong, Vice President of China Europe International Business School, to
agree that "State-owned enterprises are always at a disadvantage when they're
competing with top global companies in terms of their systems and platforms.
After the reform, Jahwa is on the same platform as everyone else." Zhang
should be ashamed of himself because his comments are nonsense masquerading as
philosophy, ignoring the fact that Shanghai Jahwa reached a zenith precisely
while being a state-owned company and incurred misery only when being turned
over to private enterprise.
As a final point, I was interested to note
that immediately upon the announcement that the Shanghai government would
refuse to sell Jahwa to an American or other foreign firm, the vultures
immediately shorted Jahwa's stock on the market, driving down the share price
by the maximum daily limits, as a way of punishing that decision by reducing
the value of the company and therefore the proceeds from a domestic sale. I
must say I was proud of the response by Ge Wenyao, the company's chairman, who
said the sale would be priced on the company's actual value, and not based on
an artificial share price caused by the actions of stock-market vultures.
•P&G
and Panda Detergent
Panda
detergent was a household name renowned for its product quality and had by far
the largest market share in China until its JV acquisition by P&G, whose
first act was to immediately raise the retail shelf price by 50%, effectively
killing Panda's sales to make room for P&G's own brands of Tide and Ariel. P&G
formed JVs with Li Kai-Shing's Hutchison Whampoa and a Guangzhou company that
owned the leading laundry and cleaning factory in southern China, in total
killing many Chinese brands, the stories being sufficient for a book I may
write. Panda's original owner managed to re-purchase the brand and place it
back in the market, but faces the same difficulties of all such resurrected
products.
•Gillette
Purchases Nanfu Battery
Fujian
Nanfu Battery was one of the five largest manufacturers of alkaline batteries
in the world, an industry leader in China, and had for years been China's
top-selling brand with a dominant position
accounting for about 60% of the domestic market and with revenues approaching 1
billion RMB. The company had assets in the billions of RMB, several hundred
thousand square meters of manufacturing facilities, and was at the leading edge
of battery research, with a post-doctoral R&D center that had developed
many new technological innovations with corresponding achievements. As well, Nanfu was already in fourth place globally,
and growing rapidly in the international market. The company's Excell brand
had been registered in more than 50 countries and its products were widely on
sale in more than 60 countries including the US, Japan and all of Europe, with
major plans already in place for further international expansion. Nanfu was so popular in China its foreign
rivals Duracell and Energizer were never able to obtain more than a minuscule
share of the market, Gillette's Duracell having a share less than a tenth that
of Nanfu, and Energizer far behind Duracell, both companies having struggled
for years without success.
Then, another American disaster, this one
perhaps more nefarious than most, and certainly one that was bitterly resented.
In 1999, the government of Nanping City
in Fujian pushed Nanfu into a foreign Joint Venture which the company neither
wanted nor needed, with investment funds coming from Morgan Stanley in the US,
the Netherlands government and the Singapore state fund. Company executives
strongly protested the JV from the very beginning, stating for one thing that
Nanfu had a huge cash surplus and absolutely no need of external funds but,
even more, protested the presence of
Morgan Stanley in the affair, stating from their prior experiences that Morgan
was only a wolf and that none of its joint ventures had ever ended well for the
victims. Nevertheless, the JV was pushed through, company executives being
assured that 51% of the shareholdings would remain in Chinese hands and only
49% released to the foreigners.
It is a bit difficult to ascertain the
original intent of all the participants in this corporate travesty. It is
possible Morgan's first thought was to slash costs to make the company appear
even yet more highly profitable, then take the firm public and profit hugely
from the IPO. However, it seems a
definite effort was made to kill Nanfu, the firm quickly having been depleted
of its cash reserves and run into a huge loss, results variously attributed
to 'bad management' but that is clearly not possible. It's almost a certainty Nanfu was simply bled of its cash by its
new "foreign investors". In response to the company's financial
crisis, the shareholdings were altered, additional shares were issued, and the
foreign ownership portion suddenly exceeded the supposed 'safety margin' of 49%
and diluted the Chinese holding to about 30%. In the interim, it was becoming
apparent that Duracell in China - and perhaps in all of Asia - was a dead duck,
and that Nanfu was likely to soon unseat Duracell from its number one position
internationally. At this point, Gillette, the owner of Duracell, was discovered
to have been surreptitiously nosing around Nanfu's foreign shareholders,
exerting pressure to acquire their shares, an effort that was eventually
successful, with Gillette acquiring about 70% of Nanfu, though at huge cost, with
Morgan selling out their two year-old
$42 million investment at a $58 million profit. All of that process
appeared to have been done under the table, with the result being a complete
surprise and a devastating blow to the company. My guess is the shareholding
redistribution was conducted in anticipation of this event since Gillette's
purchase offer produced a higher profit than an IPO might have done.
The result of the sale was that Gillette immediately shut down all of
Nanfu's export production facilities, in one swoop removing Nanfu from world
markets and therefore eliminating Duracell's largest international competitor. Gillette
could not kill Nanfu in China because Duracell had no hope of obtaining market
share and too many other domestic competitors would simply have filled the
void. This case was seen as so dishonest and underhanded, and so damaging to
China, that several universities conducted studies to determine the precise
chain of events and the real intent of the participants. At the time, most of
Nanfu's management and a great many of the staff resigned immediately. At the
time of the merger, industry insiders openly questioned whether there were a
hidden reason for Gillette's stealthy acquisition of Nanfu, having already
concluded their plan all along was to kill the Chinese brand. Gillette denied
the claim, but not long after the takeover, Gillette forced Nanfu Battery to
exit from all overseas markets. After that, half of its production lines stood
idle and the company was clearly destined for the dustbin of corporate history.
P & G purchased Gillette little over a year after its acquisition of Nanfu,
so the decision to kill Nanfu battery internationally may well have been a P
& G decision. It is not clear if the
Nanping officials who permitted this little corporate atrocity (that appeared
to have been led by Morgan) were corrupt or simply gullible, naive and
outplayed, though it appears to me Nanfu's destruction was planned from the
outset, considering the nature and character of the players and the apparently
clever shareholding arrangements. All
three foreign investors are known predators and I suspect neither
Singapore's state fund nor Morgan Stanley have a welcome carpet in China. In
any case, Nanfu and its batteries are gone from the world, one more reason for
Americans to boast that China has no international brands.
The Western media and virtually every Western
journalist will deny that American or other foreign companies would kill a
brand. Some people, even some Chinese who worked for Pepsi, P&G and other
such firms, invent any number naive and vacuous excuses to explain the
phenomenon of the total disappearance of perhaps 700 of China's best brands.
They claim some of the events - like Maxam cosmetics experiencing a sudden 98%
drop in sales - were just 'bad luck', and that others - like the disappearance
of Nanfu battery - were attributable to 'bad management'. In other cases - like
Tianfu Cola and Mini-Nurse - their view is that the American or other JV
partner "maybe didn't pay enough attention" to the Chinese product.
To these individuals, my response is this: If one house burns down on a street,
that's bad luck. If two houses burn down on the same street, that's
unfortunate. If three houses burn down on the same street, that's coincidence.
But if more than 700 houses burn down on the same street, that's a plan.
I have here described the few successes
emerging from this American onslaught of corporate homicides in China. I call
them successes in spite of their tragic experience in dealing with American
firms, since at least a few of these were able to regain control of the brand
name and processes and could hold hope of a market resurgence. I have not
listed the many hundreds of fine companies and brands that were killed and remained
dead. In most cases, these were large companies with long histories,
well-established brands and a large if not commanding market share, in every
case disappearing from the market after a few years inside an American Joint
Venture. The products included China's best and largest electric motor
manufacturing company, the heavy farm equipment manufacturer Jiamusi Combine Harvester, which had a 95%
market share until entering a JV with US-based John Deere, after which it
quickly disappeared. The list includes famous
alcoholic beverages, venerated tea brands, bottled waters, all with a prior
regional market share of 80% or more, and all of which disappeared within a few
years of entering a JV with an American firm. Most of China's famous cosmetics
brands, personal care products like toothpaste and shampoo, and so many other
categories of once-famous brands and products all suffered the same fate.
*
Larry Romanoff is
a retired management consultant and businessman. He has held senior executive
positions in international consulting firms, and owned an international
import-export business. He has been a visiting professor at Shanghai's Fudan
University, presenting case studies in international affairs to senior EMBA
classes. Mr. Romanoff lives in Shanghai and is currently writing a series of
ten books generally related to China and the West. He can be contacted
at: 2186604556@qq.com
*
Larry Romanoff is
one of the contributing authors to Cynthia McKinney's new COVID-19
anthology ''When China Sneezes''.
Copyright © Larry
Romanoff, Moon of Shanghai,
2020
